YouSaid · the spoken record

Brian McCarthy

lines on the record: 105
first: 2024-02-09
most recent: 2024-02-09
sittings or episodes: 1
sources: podcast

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“It's sort of a unique mix. I do US macro Sort of China focused bear fund, the nexus fund, because of the contention that this interplay between the US and China was sort of at the nexus of global risk on risk off because China has a big bubble. It's now bursting that's linked to the US via the exchange rate, Fed policy gets transmitted to China and it's like this huge amplifier of Fed policy, right? It's why Janet Yellen couldn't hike four times in 2016 because I thought four times there's only a little bit, but oh my God, if it blows up China, it's a big tightening. So this currency peg increasingly tenuous currency peg and this bubble in China is a real amplifier of Fed policy, which for me it would be entertaining if we got a big dollar rally and the Fed made an overtightening mistake and we had a risk off.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Because the rest of the world, again, outside of commodities, doesn't expend a lot of labor making goods for Chinese consumption. China imports oil and semiconductor, basically. And the semiconductors, for the most part, go into boxes and get exported as completed products. So the direct economic effects outside commodities are minimal. The financial effects really only come about when we start seeing the risk of a maxi devaluation, which if you look at option volatilities on the RMB, they're at multi-year lows. So the market's just not really worried about that right now.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Which might cause some big bank or other entity to have some kind of financial loss that would cause a problem because they're not really meddling with the currency yet. So because the currency break is for now off the table, that financial transmission mechanism we saw in 2015-2016 is absent to this point. And then in terms of direct growth effects, again, if you're not one of these commodity producers, it doesn't really matter because China really doesn't buy much from the rest of the world. They buy some Nike sneakers and some Apple iPhones that are made in China. So the profits of those companies, we've seen it with Apple recently, right? There are some competitive factors there too. But the profits of these companies will be under some stress if China's a big part of their profit picture. But it's not going to affect employment in the rest of the world.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, it has direct effects on commodity exporting nations, Australia, Brazil, which that story is in the early innings as well. I mean, iron ore had a decent year last year because they're still running the steel plants, but they're going to end up dumping that steel on global markets because the rate at which they're using it is going to continue to decline. So, I mean, that's a whole other part of the story Chinese demand for commodities that hasn't really even unfolded yet. But that will come and that will affect the commodity exporting nations could have broader ramifications for emerging markets. So that was the transmission mechanism in 2015-2016. Sharp devaluation from China, fears over maxi devaluation that would sort of bring back the specter of 1998, cause large devaluations, competitive devals across Asia. And then you had like a global emergent market crisis.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“So we're almost down 50% by the time the next few months numbers come down, we might be on a 12 month rolling sum of sales down 50% off the peak. Estimates of the total value of Chinese residential real estate range from seventy to one hundred twenty trillion. And you're going to cut that in half. So I think this is going to be a wealth destruction on a scale that we've never seen before. So, you know, this is going to be wrenching times for the Chinese economy, for the Chinese consumer. Xi Jinping himself is only signaled. It's going to get worse before it gets better. And, you know, all this is an economic outlook before we're even overlaying the possibility of something going wrong for China from a geopolitical perspective, which is a...”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Sure. So I think the key highlights are that China's investment-led growth model is gone. It's not coming back. They think they have something to replace it with. I'm skeptical. They're in a debt deflation in the grips of a debt deflation that can't be fixed without a reflationary devaluation. And this is all in the early innings. This is a story that I think is going to play out over the next several years. So we talked about the lead between property sales and construction activity, which is just now rolling over. So all of the problems we saw in 2023 are going to get worse even. I'm shocked at what we're seeing for property sales in January. We're seeing figures down 30, 40, 50 percent just for some numbers. The annual real estate sales in China have already fallen from $18 trillion R&B.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“They die. I mean, that's like the empirical fact, which is crazy, it's been 10% plus for 25 years. And 10%, it's like $5 trillion. So they have to increase credit by $5 trillion just to survive this year. To do what you're talking about, it would have to be closer to $10 trillion. So it would be like saying to get me through the next 18 to 24 months, here, we're going to take $10 trillion and we're going to light a torch to it. Have fun. So I think that ship has sailed”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Well, he was moving. Away from a stupid policy To a rational policy when we reopen the economy. This would be moving from the rational policy to an overtly irrational policy. Look, I don't put anything past Chinese investors. 2014 into 15 equity bubble was the craziest thing I've ever seen. So it's a tricky dynamic. I mean, it's like game theory, right? If everybody thinks everybody else is going to do it, maybe they'd go do it again. I don't know. I don't think it's sustainable. I think it would be openly acknowledging that they're pumping credit at a very, very high rate to do something that they themselves had stopped because it was unsustainable. And just some numbers. So Credit Gross at 10% in China. If it goes below that,”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“This is what investors have been arguing for the better part of 18 months. And my short answer is it would require Xi going to a podium and saying, you know what? I messed up. Houses actually are for speculation, not just living. That's effectively what he would be saying. You would need to rekindle the speculation in what everybody knows. So now, you know, we know they have like. Hundred million apartments that are just going to go wasted, they would have to decide to go to 120 million in the next couple of years. And is that credible? I just his personal credibility.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Final question that's a follow up about potential stimulus why can't China resume the Ponzi and say yeah lend to Evergreen lend trillions and trillions and trillions and let's make this real estate bubble bigger than it ever was because I would note you know what caused this crisis as you know you pointed out in your earlier presentation was not the withdrawal of saving, not a run on the Chinese renam B by households in China, but an intentional top-down decision from the Chinese Communist Party to stop lending to real estate firms and put lend more to industrial manufacturing firms. Why can't they put the genie back in the bottle?”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Now that problem's not as severe, it's just domestics don't want to hold these liabilities, they don't want to hold the M2. And there's 50 trillion of that. And you can burn through whatever is in their reserves. Yeah, it's probably a little under a trillion if you want to say Treasuries agencies from U.S. equities. Maybe that amount again as much in JGBs and European government bonds. We'll go through that like that. So it doesn't solve their problem in any way, shape or form. And once that once it's like, they're at the point with the reserves where you can't use them because once you've used them, then the emperor is completely naked.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Intervention generally doesn't work, right? Because when they use reserves, they shrink the PBOC balance sheet and then they have to put that liquidity back in the system by lending more money to banks so they don't change the liquidity in the system. So it doesn't solve the problem. It's just a habit. It's a treadmill. But also I think they just don't have the dollars. You know, the reserves compared to M2 are pitily. Really not all that impressive. So, you know, and this is the dynamic, right? It's not a dynamic where, you know, there was a dynamic in 2015-16, couple hundred billion of offshore debt didn't roll.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, those are like the last piece of hard currency capital in the system. And that's why this currency episode is much different from 2015, 2016, because they tried to manage the exchange rate by selling reserves. And the market said, oh, our bid for those dollars is like, we'll take all of them. We'll take infinity. And so they realized they were on a path to like, it's just they were just creating, they were just providing market liquidity in an off-market exchange rate given everything. So they're not doing that this time. There's smoothing and they'll come in at the end of the session and some state-owned banks will cap it at a level or whatever. But it's like tens of billions here and there. It's not, you know, 200 billion a month type thing we saw at the worst level in 2015, 2016. Why? Because it's foolish policy. It doesn't work. It sterilized.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“The degree of market manipulation that they'll undertake here. But again, just this whole dynamic, when we walk through like we just did recapitalizing the banks, it's like, what really are we talking about? The Chinese government is not sitting on a vault full of gold. I mean, they have reserves, but we don't know what those are anymore either. What about the U.S.?”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“So, you know, the Sobons again, two thirds of the government bond issuance is purchased by banks. So where does the government get the money to recapitalize the banks? The banks buy the bonds and create deposits, the households. So it's just all a game of writing IOUs to the households to get them to work for nothing. Right? You know, to get them to work and instead of getting goods and services for their labors, they get IOUs that are increasingly sketchy looking. I don't think we've ever seen anything like this. It's been the most fascinating thing I could ever have imagined stumbling into, but I've been doing it long enough to know the question everybody really wants to have answered is when? And I just found that one a while ago because we've just never seen anything like.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“That's the system. So, you know, a banking recap, if you take the bad debt, if they acknowledge, which they'll have to eventually that the assets on the asset side of the bank's aggregate balance sheet is not worth par, then they've got a hold to fill. And the Chinese government can just borrow money to give it to the banks to fill that hole. But how do they borrow money? They sell bonds to the banks.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“So the banks, the capital in Chinese banks, it's sort of like fictional. They try to adhere to these international regulations because they want to do international business. So they have, yeah, they have to maintain these capital standards, right? Yeah. But from a domestic standpoint, it's all already one balance sheet. You know, these banks are the government. It's all the government. You talk to investors in China. I've had dozens and dozens and dozens tell me, you know, the way to make money in China is follow government signals. Like, that's the system.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“What about the recapitalization of the banks by the state owned banks just basically that the government taking a hit so that it's not private shareholders? And then the banks can just issue more equity and the private sector owns more. What would that stop from that? Would it be an ideological aversion to that? Or would it be the same concern about the currency?”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“The only other path out, and I think the mindset they're in now, is just hope like health that the Fed pivots. Hope like hell, we fall into recession in the US. The Fed has to go back to 1%, and the dollar comes off, and then 7.2 RMB against a weak dollar is a lot easier. You can have easier monetary policy than 7.2 against a strong dollar. So I think that's where they're at now. And if that doesn't come to pass in the next three to six months, maybe they try another experiment with creating some room in the currency, but it's just, it does seem to be an all-or-nothing prop for them.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so just as you know economists guesswork, what's 9, 25%, 30, 28% or something, seven to nine? You know, maybe you get 10, 12% inflation for a few years. I don't know, maybe you do eight and a half, whatever. You find a level where you get some degree of inflation so that you can get nominal growth, your real growth instead of three nominal goes to seven nominal. And the industrial profits revive a little bit and the debt load looks less obviously unsustainable. Maybe buy yourself some time that way. Hope to get to the next Fed QE cycle and, you know.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, yeah. You can't float. And, you know, so, but you need a little reflation. Just do like try maybe nine and then do a firm peg and see what happens.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Or a Gary Cohn were, but who knows? We don't know how his staff up or any of this. But I think there's either Trump or some kind of other geopolitical breach could cause a sharp devaluation of the RMB. As an economist, if you got me in a room with Xi Jinping, I would say just try nine and a half, see if that works. Repag.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Decides on, and they say, Well, we're not going to do that, but if you do 30% tariffs, we have to let our currency go. Might blow up the global financial system. It might not. You'll see. So I honestly think that's the threat they were making in 2019. I have no way to prove that, but I think it just watching the way that dynamic played out. China, I believe, said, you know, we're not playing the game anymore. We're not giving you anything else. And stop with the tariffs or, you know, this can go another direction. I'm not going to try to read Donald Trump's mind or try to decipher at this point what's bluster and what's policy. I can tell you I have a friend who was in the Trump Treasury who says the personnel that are around Trump this time around are more diehard America first types who are willing to sort of press those buttons more than maybe a Steve Minuchin.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Would say they'll go the Japan path only, you know, Japan has a pretty robust industrial economy that can sort of grow their way out of it over two decades or whatever. If Xi Jinping, if this moving up the value chain proves to look like really wasteful, they won't be able to do what Japan did. But that's the path they're on. I think the currency break probably comes in response to either if the Fed really makes a mistake and we have like a mini 2007 type thing here, you know, where DXY rallies 15 or 20%, they may say we just can't handle this. Or I would imagine if Donald Trump gets re-elected, there will be some discussions behind the scenes where he says, you know, if you don't do X, Y, Z, I'm going to tear you by 30% or whatever the heck the number.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“So, how do you think this plays out over the next few years? It sounds like you think that this stimulus and this weakening of the Chinese Yuan, the renminbi, it will occur, but that there will be a long period of time before it occurs. First, there's going to be debt deflation before that solution comes.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Now, if you have 14% unemployment, you get 14% of the population is pretty pissed off. If you have 30% inflation, you have 100% of the population, many of which, a big proportion of which lives at like subsistence levels. So I think that's mobs in the streets. I think that's the problem. I think that's why they're stuck. And again, you know, they put my devaluation trade back in the bottle in 2015, 2016. So I'm still a little bitter about it, but they should have stuck with it then. They should have taken their medicine then. It's just a hell of a lot worse now. But the dynamics the same. It's just a lot of pressure because they're trying to manage at a rate that's way off market.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“That's going to have 20 inflation, maybe. It's a lesser developed economy than the US. The monetary shock will transmit much more rapidly than ours did. And we just got a lesson like, can you believe how quickly the $6 trillion we printed, of course, through the system here? It was wild. So in China, they could have 20% inflation overnight if they have a maxi devaluation.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Then the market will be one way till we get to $12. And in fact, the history of these things because it goes to 15 and then settles at 12, right? They always overshoot. So I don't know, maybe the equilibrium of 10 and it goes to 12 and comes back. It's just there's no, and again, 2015, 2016, they experimented with easing out of this box and it almost immediately blew up on them. So the market says like, you know, they could take it to nine and just rep, but then they just have the same problem, which is they're at an off-market rate. So the only way to solve that problem is get to a market rate. And nobody knows where that is. The problem is if it's 12 or 10 and you develop by 30 or 40 percent, I'll bring this back around to where you started with the question.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, this is completely different. There isn't like a built in doom loop. It's simply a question of it's been controlled at an increasingly non-market rate. If the market rate at which China has reflated sufficiently to make its balance sheet look stable is...”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Explain how a rapidly appreciating dollar, so a depreciating Chinese yuan negatively impacts China. It's not the way that a lot of people listening to this might think of, you know, when the Thai bot was devalued, that's because there's so much dollar denominated debt. And then when the dollar strengthens, what they owe becomes greater. There is not a lot of dollar-denominated debt in China, right? So where is the weakness? Is it just that, well, it changes trade? Doesn't trade get stimulated when the currency weakens?”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Into a debt deflation spiral. And ultimately, this is what happened. So they went back in 2016, repugged, and then they got some help because Janet Yellen went to Shanghai in February of 2015 and got the pants scared offer. It was like, oh my God, we've dotted to four hikes this year. But if we do that, this place is going to blow up. And they ended up not hiking at all.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Do and they devalue three percent in the day, and then the next thing they knew there was no dollars to be found. They tried to intervene, spent, I think the reserves came downtown by a trillion, there was at least another half a trillion of dollars that Chinese banks borrowed via FX forward and spent was at least a trillion and a half in like less than a year. So they were like shocked at the degree of the disequilibrium. So the only way they could control it was clamping down even harder than they were before. So the whole thing boomeranged on them. And I look back now and I say, you know what? They should have sucked it up then. If they had sucked it up then because my premise at the time was they can never get off the investment-led growth thing at a fixed currency because you'll go.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“It always comes down to which dimension they think is the least risky from the stability of the Chinese Communist Party. There's so much pressure built up in the currency now. Now, as an economist, You're absolutely right. And so I ran something called the Nexus Fund, an emerging sovereign group, which was a big China bear fund. The day they did a 3% devaluation in 2015, I think we were up like 72%. It was a little crazy. We had like the whole fund invested in one to two year dollar CNH calls primarily. And I made as an economist that was correct. The political economy ended up biting me in the ass because they decided, so the dollar strengthened a lot 24, 2015, 2014, 2015, transmitted a tightening to China. They had a downturn pretty severe. And they said, we need to ease. No, we want to be more market-based anyway. Let's try to get off this currency league so we have room to ease policy and not get strangled to death by this strong dollar, which was absolutely the right thing.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Said that the reason that the Chinese government can't or won't do stimulus is because it will weaken the currency. I presume that goes to either cutting interest rates further from the people Bank of China or this central government borrowing money and basically giving it to people in terms of direct fiscal stimulus or having some sort of stimulus with companies or individuals as was the case in the US map out exactly why you think that's so undesirable for the Chinese communist party You're saying it's because they can no longer keep the exchange rate and why is that even desirable? You know if I have to either devalue my currency or send my country into a depression the Bank of England in the 1930s you know they they said no let's send my country into a depression I think you know historians and economists agree that that was a huge mistake why why would China make that mistake again?”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“It wasn't really, it was just the company started to accrue a degree of political power that's untenable in that system. And they had to be rolled into the national planning fold. But there's still some great businesses and they're going to be throwing a lot of money at that sector. So if you want to be somewhere in China, that would be it. But I think the banks are ultimately zeros and on a sort of an index-wide basis. This is an economy that's just going to grind to a halt.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Does it still part of that, right? You don't even like, you just roll them into this big entity. And then you know the government is putting it on their own balance sheet. They want to do it through the banks. And the banks are like, you're just going to blow me up. I mean, at the same time, there's hundreds of these rural cooperative, smaller banks, which are being rolled into medium-sized banks, which will have to be rolled into the big banks. So, you know, this is really somewhat new. In my perspective, the level of bureaucratic foot dragging by these banks is really not something I've seen before. They're really pushing back. But the government will end up saying, you know, gun to your head, like, yeah, fine. We'll either give you the guarantee or we'll just make you do it, but they're going to have to do it. But you are seeing a lack of policy traction. So the banks just avoid, avoid the banks at all cost. And if you want a bottom fish in Chinese equities, it's tech. They're really cheap. And, you know, the war against tech is over.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Developers are actually saying, I need my ass covered, I want some kind of guarantee that when this blows up, I'm not going to take the blame for making a bad loan here because we all know it's a bad loan. And I honestly don't even know why the government insists on doing this through the banks. I don't know. I think it's just because the problem is too big. And so for those who say they have all this central government balance sheet they can use, the problem is too big because logically what they should have done is taken country garden and evergrand and these other deadbeats and just roll them into some big, either an existing state-owned developer or build a new institution roll them all up and say this is now the state, evergrounds evaporated the ninety billion that they got for these apartments, but we're going to borrow the money as a big central entity and finish the apartments. And maybe the Evergrand operating group that's...”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Have to do that because the Chinese Communist Party is saying if you don't do this, millions and millions of people who bought apartment buildings that don't exist yet, they're going to be protesting in the streets, which we saw a little bit of two, three years ago.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Equity held by offshore investors they can tap to fill this gaping hole in the Chinese national balance sheet will be tapped. So, you know, the central government will recap the banks at some point, but your equity is going to be going to be wiped out. And these are not market-based institutions by any stretch. So one of the interesting dynamics is they're being told to lend to the property developers, but they're having trouble executing the central plan this year because the bankers are saying, okay, we know Evergrand has $90 billion worth of apartments that they've sold but not yet delivered to the households who bought them. And the $90 billion they've evaporated it. So you want me, Bank XYZ, to lend to Everground to finish that project, but I'm lending into a black hole. That money's already gone. They can never pay me back. So it's, you know, the banks have to do national duty.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so I'm short the H shares to Hong Kong listed China shares which already trade at a 50% discount to the onshore shares, which is crazy. Unfortunately, it's very, very tricky to trade these things because the basis between the offshore shares and the onshore shares, in some cases the same exact companies is all over the place. It can be two or three percent on a day-to-day basis. So like sentiment is just really like treacherous, treacherous stuff right now.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Right. So just go back to the stock market so you're still bearish on the entire market, you still short the entire market, as I should say, but any view on Chinese banks in the financial sector versus the large cap tech? Because in a previous conversation we had, I asked, what do you think about shorting the Chinese banks? And you said almost instantly, I like it, but then you also said that you thought the Chinese tech stocks were very cheap. So are you more bearish on the banks than you are the tech companies”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“China's all along. But so phase one was, I thought a terrible deal because, again, it was matching their central plan with one of our own. But the only thing we got from China, the only thing we got there, was the list was measurable. They're going to buy X billions of dollars worth of soybeans by this date. And they didn't do it. And the date came and went And the US trade rep and the Biden administration said nothing. So, what happened there? I don't recall the stories in the Washington Post and the New York Times or Fox News or the Wall Street Journal or anywhere else saying, hey, what's the deal here? Like, we actually negotiated this mechanism to resolve these kinds of disputes with China. They didn't meet the targets. And we just let it go. Strange.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Climate. It's always been baloney. So I don't know why we would believe them now. They have no credibility to say they're going to cooperate on anything. And one thing that sort of irks me, one of my pet peeves, we talk about bipartisan consensus and the approach to China and how the tone has changed. Nonetheless, the phase one trade deal, which I hated, okay in phase one trade deal, the construction was we can't change China's central planning behavior. So we're going to balance it by presenting them a centrally developed list of stuff they need to buy from us, which is the only way the global system can manage having China at the center of it. So if China is essentially playing economy and they're at the center of global trade, then it just doesn't work. The market economies can't compete. They'll have to move towards central planning, which is, I hope maybe better brilliant plan of China.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, the politics are just demanding something here. I'm not deep into the weeds in the semiconductor industry. But these controls have more loopholes than you can shake a stick at. I mean, you know, we saw the ASML, the Dutch machinery company still selling a lot of machinery to China. The Dutch are debating whether they should shut that down. I think they're not completely insignificant, but I think there's a fair amount of bark with the bite when it comes to those controls. And, you know, in other aspects of the relationship, Biden's really pressing for a detente. China's going to cooperate on fentanyl.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Right? If they were ever going to do it, it's like, oh, well, we have to do this to help domestic consumers. I don't want to help China, but we have 9% inflation. And even then, they couldn't do it. So I think what's actually happened is he's more hawkish than the bipartisan consensus was previously because the bipartisan consensus is more hawkish.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I think they're sort of faux hawkish. Now, I'm fascinated to see what Joe Biden says about the tariffs on China in a debate because they're still there. So to your point, it was just, it's been politically untenable to reverse those tariffs, despite the fact that we had a double digit inflation episode. Mean, if they were ever going to do it.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“There's always a lot of bluster there for sure. I thought at the time that the phase one trade deal, he did in 2019 was just a punting exercise. My reading of the dynamic there said like China said like, all right, we've had enough. You know, you twist my arm one more increment and we're going to the mattresses. You know, you want to have a real global trade war. Let's see. Let's see how that works for you into an election year. And he did the phase one trade deal. Now my hunch is, in the second term, he was going to come back to slapping China around, but that I have, who knows, right?”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Don't turn around in a structural sense unless they're ready to devalue the currency. There's absolutely no sign of that. So they're really stuck. And then there's all kinds of external risks. I'm in the camp that the feds overcooked it. And we're going to maybe this New York community bank things are another canary in the coal mine. If the U.S. economy slows, we could see credit events pretty quickly and a sharp dollar rally. China's screwed if that happens. Like that would through the exchange rate link, that would transmit a monetary policy tightening to them that would be completely unmanageable. So they'd probably have to allow some movement in the currency could get very, very messy. And then the other big risk is Trump, of course. I have no idea how serious he is.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Which in the short term would have a great effect from very oversold levels. Of course, whatever shares they don't buy end up being worth less because now the Chinese government is even more involved in everything. So I think everybody knows it's sort of self-defeating. And it didn't really work all that well in 2015. They did something similar. So I don't think they're going to drop that bomb on me. I'm still short as we speak. But a little more nervous than I've been for sure. But I just, again, I think the story.”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT
“Trade at this point because the short Five trillion RMB or a trillion dollars, seven trillion RMB, or something crazy, you know, we're going to have the PBOC effectively lend that money or print that money by making loan to some central entity, central WeGen or the CIC or some wealth fund new vehicle they set up, whatever, and it's going to buy trillions of RMB worth of stock to prop up the market”
2024-02-09 · Forward Guidance · China’s Deflation Trap | Brian McCarthy On The Popping Of The World’s Biggest Bubble Ever · IDENTIFIED FROM THE TRANSCRIPT